Timken Company's share price soars on news of steel division spinoff

View full sizeDemands from investors have forced the Timken Company to announce plans to spin off its steel business to a public company in order to increase profits.Timken Company

UPDATE 2: Moody's Investment Service has revised its outlook for Timken to negative from stable because of the company's decision to spin off its steel division, the announcement that its two top executives are leaving and because of its willingness to respond to activist shareholders who pushed the company to spin off steel in the first place in order to drive up the value of the stock. Despite the change in outlook, Moody's affirmed Timken's credit rating of Baa2, because of its strong market positions in roller bearings and other highly engineered products and because of its modest debt.

UPDATE:The Timken Company announced Monday morning that Glenn Eisenberg, executive vice president of finance and chief financial officer, plans to leave the company
next year when it spins off its steel division into a separate company from its bearings and power transmission division.

"I'm very pleased with the company's accomplishments over the years, and
feel that the timing is right for the next generation of leaders to
take over the new companies," Eisenberg, who has been with Timken 11 years, said in a release.

Philip D. Fracassa, who joined Timken in 2005 and was named senior vice president for planning and development in 2012 , will become CFO of the larger bearings and power transmission company when Eisenberg leaves.

And Christopher J. Holding, in charge of tax and treasury matters since 2010, is expected to become CFO of the new steel company. He joined Timken in 2004.

James Griffith, president and chief executive officer, last week said he plans to retire when the split is complete.

CANTON, Ohio -- The Timken Co.'s stock price briefly soared past $63 on Friday -- an all-time high -- as giddy investors clamored to buy shares on news that the company would spin off its steel-making division within the next 12 months.

The question on the minds of some analysts was whether the new publicly-traded separate company, with sales under $2 billion, might then be gobbled up by a much-larger global steel company.

A month ago, amid speculation about the anticipated spinoff, one investor analysis service, Connecticut-based Litchfield Hills Research, warned that a spinoff would make the new steel company a takeover target.

"It is our opinion that this will doom the steel business and the employees who work there.

"The steel business as a stand-alone public company will be small, meaning there will be little institutional interest," the report argued.

"The spun-out stock will likely be dumped by institutions. The business will struggle with overcapacity. The employees will face layoffs," the report concluded.

The steel division currently has about 3,000 employees while the bearings side of the business -- the company that will remain as Timken -- has about 17,000 workers.

In an interview Thursday, James Griffith, Timken's CEO, said far from being a takeover target, the new steel company share price would be properly valued - and therefore not a likely target. In fact, he said, Timken itself has been undervalued.

Griffith and other top Timken executives would not say during a Friday teleconference with analysts whether other steelmakers had approached them in the last several months to buy the steel division. A special company committee has researched the idea of spinning off steel for months, talking to institutional investors around the nation.

Activist investors had forced the company to think about the spinoff in a campaign that began last fall. They argued that the stock price of Timken has been undervalued, considering how well the company is managed, its available cash flows, and its reputation as a top-notch operation.

By creating two separate companies, the argument went, investors would be able to judge the attractiveness of the larger bearing and transmission company and the engineered steel-making division separately.

The behavior of investors on Friday made it clear that no matter what happens to the new steel company in the long run, investors want a piece of Timken before the spin-off occurs because existing shareholders would receive shares of the new company.

Nearly 3.9 million Timken shares were traded on the New York Stock Exchange Friday, roughly four times the daily average, before the share price settled, ending the day at $61.52, up $1.26 from Thursday's closing price and up $5.46 from Friday, Aug. 30.

During the teleconference with analysts, Griffith said Ward "Tim" Timken would head up the as-yet-unnamed new company, serving both as chief executive and the chairman of the new board. Griffith said he would retire.

Other Timken family members may also be on the board, but Ward Timken said those kinds of decisions would be made later.

Timken's current board plans to name Richard Kyle as chief operating officer of Timken after the steel division is spun off. Kyle is now chief operating officer of Timken's bearings and power transmission division.

Among the analysts peppering the executives with questions, one asked whether the board of directors had considered that other steel companies might want to buy Timken's steel division. Glenn Eisenberg, executive vice president of finance and chief financial officer, said he could not reveal, by law, that kind of detail.

"What we can tell you is that as the board deliberated the course of action that it was going to pursue, it looked at all options and after evaluating all the options that were available to the board, it shows that the separation into the two independently-run public companies was the best course of action for the shareholders," he said.

While analysts had detailed questions about how the company would divide debt between the two new companies, how pensions would be handled, and whether the steel company would have access to Timken's world-class laboratories, Griffith, Ward and Eisenberg said it was just too early to give any kind of detail.

Kyle, Timken's chief operating officer, said the two divisions already have separate management teams, making it much easier to spin off the steel division.

He said the important point was that the two companies would be completely independent.

Griffith addressed another seemingly sore point - where would the steel division sell its steel? He said the company now buys 15 percent of the steel division's output, meaning the steel division already sells to other companies.

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